Company Reports

We are not changing our Penske Automotive Group fair value estimate after the company reported a solid first quarter 2024. Diluted earnings per share declined 25.5% to $3.21, missing the $3.35 LSEG consensus. Revenue rose year over year by 1.5% while same-store retail automotive revenue fell 0.7% as good service growth of 4.9% could not offset low-single-digit declines in finance, new, and used vehicles. The 43-store truck segment saw revenue fall by 11.6% and 15.2% on a same-store basis due to poor new truck sales caused by supply chain problems hitting the industry, such as a supplier fire. Retail automotive saw a 13.2% fall in new vehicle gross profit as new vehicle gross profit per unit fell by 17.2% to $5,229, excluding Mercedes agency business in the United Kingdom, which has been a commission business since first quarter 2023. These large new vehicle declines are everywhere in the dealer space now due to profits coming down from large artificial highs induced by the chip shortage, so we are not concerned with their magnitude.

After rolling our Penske Automotive Group model forward one year for the 10-K filing, we are raising our fair value estimate to $142 from $130. The change is primarily from a lower share count and modeling faster inventory turnover, with both factors roughly equal in impact. We now model $300 million annually for share repurchases ($350 million in 2024) across years 2-5 of our explicit forecast period instead of $50 million per year in our prior model. This change is appropriate because the company has cumulatively spent over $1.5 billion on buybacks the past three years, and we expect future spending to be more like these recent levels rather than lower levels prior to the pandemic. Year-end 2023 share repurchase authorization was $215.5 million with no expiration. Our diluted share count for the valuation is now about 64.9 million, down from 67.7 million. The faster inventory turnover modeled is from our expectation of turnover slowing from recent artificially high levels caused by the chip shortage but turnover not falling all the way to prepandemic levels because we expect automakers to keep dealer inventories lower to maximize profit for them and to help dealers. The turnover increase change is only equal to about 0.3 times faster than our prior assumption.

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business—a 100% gross margin business—as its peers because more of its customers lease vehicles or pay cash. The firm leases nearly all its real estate, so when excluding rent, Penske's SG&A ratio is competitive.

Penske finished 2023 with a solid quarter, but one with continued pressure from used-vehicle affordability, a common problem in our dealer coverage due to the chip shortage driving new and used-vehicle pricing higher amid tight vehicle supply. We retain our fair value estimate but will reassess all modeling inputs after the 10-K is filed. A modest increase is possible due to a lower share count after modeling further buybacks in 2024, however, 2024 equity method income is also likely to be far lower than we presently model, which could offset the share count decline.

Most automakers reported final sales numbers for 2023 on Jan. 3. Adjusting for one selling day fewer, Wards put the year-over-year December sales increase at 17.3% and the seasonally adjusted annualized selling rate at 15.83 million, up from 13.55 million in December 2022. Full-year sales increased 12.4% to 15.46 million. We think the worst of the chip shortage is finally behind the industry, but we expect some supply shortages in 2024. As inventory continues to recover, we expect incentives as a percentage of average transaction price to keep rising from artificially low levels of barely above 2% in late 2022 (currently just over 5%), which will pressure automaker and dealer margins in 2024 relative to the past two years. Better inventory and U.S. interest rates likely done rising should bring some consumers back to the showroom. Affordability remains a challenge though, so we expect only a small increase in 2024 light-vehicle sales to the high 15 million range.

At the Los Angeles auto show on Nov. 16, Hyundai announced a partnership with Amazon in which, starting next year, some of its dealers will sell new vehicles on Amazon.com. The news sent each of the six franchise dealers and CarMax down about 5%-8%, which we think is a large overreaction predicated on fears of Amazon taking share away from dealers. Such a risk is not even possible on new vehicle sales due to state franchise laws, nor do we think it is likely that Amazon wants to do all aspects of auto retailing such as handling and disposing of trade-ins, service, and finance and insurance offerings. Service is a very underappreciated benefit that dealers provide customers when comparing the traditional auto industry to digital retailing and electric vehicle startups' direct sales formats. Should Amazon directly sell used vehicles someday, CarMax would have more competition, but it also has the ability to sell via brick-and-mortar, digital-only, or any combination of both depending on what the customer wants, something a digital-only retailer cannot offer. Our auto coverage has been implementing omnichannel tools for years and we doubt that any of their management teams are surprised by the Amazon news.

Narrow-moat Penske Automotive Group’s third-quarter diluted EPS fell 15% year over year to $3.92, missing the $4.04 Refinitiv consensus. Results include what we estimate as a $0.06 EPS hit for a Texas hailstorm destroying 750 vehicles in September and a $0.02 foreign-exchange tailwind. We have increased our fair value estimate by $2 per share to $130 on the time value of money. The truck segment posted all-time record pretax income on higher new- and used-truck profitability. We see the company well positioned for further organic and acquisition growth—or a 2024 recession—due to its strong balance sheet, with net leverage of only 1.0 times EBITDA and credit line liquidity of $1.4 billion. The board has increased the quarterly dividend four times this year, with the most recent move a 9.7% rise announced Oct. 18 to $0.79 per share. We see Penske as the best dealer for investors most concerned about dealers suffering from the United Auto Workers strike because the Detroit Three only constitute about 1% of the firm’s retail automotive revenue.

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business—a 100% gross margin business—as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske's SG&A ratio is competitive.

Penske Automotive’s second quarter showed continued strong new light vehicle and new truck demand as well as double-digit retail automotive service gross profit growth. Diluted EPS fell 10.5% year over year to $4.41 but still beat the $4.19 Refinitiv consensus. Revenue set a quarterly record rising 8.1% to $7.5 billion, also beating consensus. We are raising our fair value estimate to $128 per share from $123 on the time value of money and a higher long-term return on capital assumption than previously modeled.

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business--a 100% gross margin business--as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske's SG&A ratio is competitive.

Penske's first-quarter diluted EPS of $4.31 beat the $4.13 Refinitiv consensus and fell 9.5% year over year. Foreign exchange took $0.11 from the figure as well as $294.2 million from sales. We are not changing our fair value estimate. Same store retail automotive revenue rose 1.9% (up 6% excluding foreign exchange) on good growth from new vehicles and service. The 39-store truck dealer segment is enjoying stellar demand for new Class 8 trucks and a 12% rise in new truck gross profit. Further, 17% profit growth in truck service offset a 66% decline in used truck gross profit. Penske raised its dividend in January by 7% and spent $110.2 million on buybacks in the quarter. The board increased the repurchase authorization in February by $250 million, leaving $214.1 million remaining as of March 31. With a leverage ratio of only 0.9 times and the company recently increasing its U.S. credit line by $400 million to $1.2 billion, we see Penske well set up for acquisitions if it finds the right bargain and for continued buybacks and dividend growth.

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business--a 100% gross margin business--as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske's SG&A ratio is competitive.

Penske Automotive Group finished 2022 with record fourth-quarter EPS. Despite foreign-exchange headwinds taking $0.09 off EPS from continuing operations, EPS rose 6% year over year to $4.21 and beat the Refinitiv consensus of $3.95. We are leaving our fair value estimate in place but we will revisit all modeling assumptions after the 10-K is filed. We see the company well positioned for 2023 whether the U.S. has a recession. The firm's liquidity is solid at over $1.1 billion and debt/EBITDA remains below 1 times at 0.8. Management continues to reward shareholders via both dividends and buybacks while many of the other five public franchise dealers focus more on buybacks. The quarterly dividend increased 7% on Jan. 25 to $0.61, about a 1.8% annual yield as of Feb. 8, and tends to increase every quarter. Share repurchases totaled $886.5 million in 2022 for 8.2 million shares, or about 11% of shares at the start of the year. 2022 annual acquired revenue of $1.3 billion, although not small, could certainly be higher should management want it to be, but the firm remains disciplined on how much it will pay.

2022 U.S. light vehicle sales per Wards were 13.7 million, an 8.1% decline from 2021 and their worst year since 2011’s 12.8 million. December sales, however, grew 4.9% year over year with the seasonally adjusted annualized selling rate at 13.31 million, up from December 2021’s 12.72 million. The chip shortage rather than poor demand is to blame and we expect one more year of constrained production for the industry. Regardless of high interest rates and average transaction prices over $45,000, we feel U.S. autos have been at recessionary levels for a lot of the time since spring 2020, so we expect 2023 sales to rise by midsingle digits. Gradual improvement in new vehicle inventory should help used vehicle pricing eventually be more affordable for consumers, which is also good for dealers’ used vehicle margins that are currently squeezed by high procurement costs.

We are not changing our Penske Automotive Group fair value estimate after a record third quarter which saw the company do well despite the strong dollar hurting translation of foreign earnings primarily from the U.K. International business is about 35% of the company’s results, but diluted EPS from continuing operations grew by 3% year over year to $4.61, beating the $4.38 Refinitiv consensus. Foreign exchange deducted $0.14 from EPS.

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business--a 100% gross margin business--as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske's SG&A ratio is competitive.

Penske Automotive Group had its best-ever quarter with diluted EPS of $4.93 (beating the Refinitiv consensus of $4.47) up 17% year over year despite a 1% decline in revenue. Sales rose by 2% on a constant currency basis and exchange also reduced EPS by $0.11. This headwind will remain for a while, in our view, given the rising U.S. interest-rate environment causing the dollar to strengthen against the British pound and the euro. We see the company in great shape with a very healthy balance sheet and the ability to keep generating cash for both share buybacks and acquisitions. We intend to raise our fair value estimate to about $113 from $109 on a lower share count, slightly higher average operating margin and top-line revenue growth over our forecast period than previously modeled, and the time value of money. Peer dealers AutoNation and Lithia have embraced having a captive finance arm, but CEO Roger Penske said a captive does not make sense for his company. Penske has a brand mix skewed heavily to premium brands (about 70% of retail automotive revenue), which do much more leasing than volume brands, so we understand his reluctance.

Penske Automotive Group receives 92% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business--a 100% gross margin business--as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske's SG&A ratio is competitive.

Penske Automotive Group started 2022 by posting an all-time record quarter with diluted EPS more than doubling year over year to $4.76, beating the Refinitiv consensus of $3.77. We plan to increase our fair value estimate by at least about 5% from $104 due to time value of money and more equity income growth for 2022 than we were previously modeling. Equity income rose by 115.9% in the first quarter, which is normally the weakest quarter for the firm’s equity method investments (mostly its 28.9% stake in Penske Transportation Solutions).

Penske Automotive Group receives 92% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business--a 100% gross margin business--as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske's SG&A ratio is competitive.